World Bank pans govt subsidy program

JAKARTA (JP): The government's huge subsidy commitments are unsustainable and could lead to economic disaster if the policy is not revised, a senior World Bank official warned yesterday.

World Bank Indonesia director Dennis de Tray said the government must carefully set a clear focus in its fiscal program.

"Subsidies are clearly not sustainable," he said at a capital market conference, warning that the program, if not revised, could lead to economic disaster in the long term.

He added, however, that the World Bank and the International Monetary Fund fully supported the subsidy programs for the short term to help the poor survive the economic crisis.

De Tray indicated that the government was currently devising a program which would better target the subsidies.

The government has allocated a huge amount of funds to subsidize basic staples, such as fuel, rice, wheat flour, cooking oil, medicines and sugar, in its current budget ending in March 1999. The subsidies are largely responsible for creating a record deficit equivalent to 8.5 percent of the gross domestic product projected for the state budget.

Most of the deficit is being financed by international aid.

A group of 15 local economists last month lambasted the government over the huge subsidies, saying they comprised a populist policy merely to win support for President B.J. Habibie's administration.

They argued that the subsidies were unsustainable and could lead to uncontrollable inflation.

Economist Anwar Nasution said yesterday that the Habibie administration must strictly limit its subsidies to certain commodities to prevent even greater economic turmoil in the future.

He said subsidies for cooking oil, flour and fuel were not necessary because they were not essential for the poor to survive the crisis.

De Tray noted that Indonesia must not only address its capital outflow problem but also the increasing level of human capital being drained due to worries that social unrest like that seen during the May riots could recur.

"Reversing capital outflow is an important element to recovery, but the key issue is the entrepreneurial capital flight, which is a major loss to the country", he said, adding that the key to solving the problem was to restore confidence.

Many talented Chinese-Indonesian professionals fled the country following the May riots which were seen to target the ethnic group.

"Confidence of the Indonesian people may not return until a political change is underway," de Tray said.

"Another important thing to remember is that it is action, not words, that restores confidence."

He said the government must also be aware of market perception regarding its actions.

"You have to stay ahead of the expectation curve. Good policies that lag behind market expectations will not restore confidence," he added.

The government, he said, must improve on its poor public relations capabilities to win international confidence.

"Indonesia is in the business of selling itself... and it is competing with other crisis-hit countries in the region." (rei/gis)